FPJ Edit: RBI by itself cannot rev-up the economic engineby Editorial
Despite the RBI’s activism in easing monetary policy, and other such measures aimed at boosting faster credit off-take, it is unlikely that it would serve the intended objective. For, easier terms, record low interest rates, provision of ready collaterals etc., cannot by themselves prove sufficient to revive the economy. The central bank under Shaktikanta Das, admittedly, has not flinched from doing its bit. Indeed, some would argue that it has been more than eager to come to the rescue of a beleaguered economy. It is, however, the economy which refuses to get back on track for want of demand, a sharp dip in the overall sentiment, global slowdown, more anxiety and uncertainty in the coronavirus period. On Friday, in an extraordinary meeting of the six-member monetary policy committee, the central bank cut a record 40 basis points in the policy rate. The repo rate at 4 percent is lowest in years while the reverse repo rate — the rate at which banks park their money with the RBI — was cut to 3.35 percent. Yet, banks were saddled with so much cash they had no option but to deposit it overnight with the RBI. At 4 percent the policy rate is lower by as much as 2.25 percent since April last year. Since the phase one of the lockdown on March 24, the RBI has cut the policy rate by 1.15 percent in two special meetings of the MPC. Whether or not there is a fresh demand for credit in the economy, it is most likely the existing borrowers will be net beneficiaries of the sharply reduced interest rates, something which should help them service their debt at a time when the economy is in the grip of a slowdown. RBI has also extended loan moratorium to help businesses recover from the lockdown blow. But the situation seems to be grim. The six most affected states by the virus account for about 60 percent of the industrial output. The RBI Governor noted that the biggest blow from the pandemic was to private consumption which accounts for 60 percent of domestic demand. With incomes shrunk, businesses shut, labour missing from its previous stations, it is unlikely that consumer demand will pick up anytime soon in the near future. The RBI itself acknowledged this, noting that growth in the current financial year will be negative. So, what is the central government waiting for? It must do its bit to boost sentiment and help the economy get back on track. Its so-called Rs. 20-lakh-crore rescue package was a sheer mirage, offering no immediate help to generate demand and to incentivise economic actors to energize the growth engine. Retaining fiscal purity at the cost of public weal and poor growth is a terrible mistake.
The Government needs to flush the economy with larger cash payments to hard-pressed victims of the virus lockdown, a point the Opposition, too, made last Friday at the video-meeting of 22 parties. It sought a revised economic stimulus package which offers cash in hand to the helpless victims of the pandemic. At the end of the four-hour meeting, the joint statement dismissed the PM’s relief package as of little help. Instead, it demanded a cash payment of Rs. 7,500 to every family outside the income-tax net for the next six months. It also demanded that the migrants who had returned to their home states be brought back to run the economy. Free distribution of PDS food up to ten kilograms of cereals per month to every BPL family was another demand. The Sonia Gandhi-convened meeting attracted regional parties and other smaller outfits. However, the Samajwadi Party and the Bahujan Samaj Party declined the invitation while the Aam Aadmi Party was not invited. The joint statement sought that the prime minister revive the spirit of federalism and involve the opposition groups more closely in framing pandemic policies and to plot the way out of the lockdown. Hopefully, the government will consult the Opposition on all pandemic-related issues. It is not a partisan issue and needs broader political consensus to end its deadly menace.